Inheritance tax liability confusion

Karin Price Mueller/The Star-Ledger  writes: Question. I live in New Jersey. My aunt, who lived in Connecticut, recently died and left me some money. To which state or states do I owe inheritance tax?

— Trying to do the right thing

Answer. We’re sorry to hear about your aunt, and we’re glad you asked the question.

The executor of your aunt’s estate would carry most of the burden of administering her estate, while you as the beneficiary may be less involved, said Christopher Roman, an estate planning attorney with Einhorn Harris Ascher Barbarito & Frost in Denville.

"Assuming your aunt died a resident of Connecticut, the laws of Connecticut will govern the taxation and administration of her estate," he said. "If, based on Connecticut’s estate tax laws, your aunt’s estate owes estate tax to Connecticut, her executor will be responsible for completing the appropriate forms and paying the tax in accordance with your aunt’s will."

For 2014, your aunt’s estate in Connecticut may owe state estate taxes if it’s worth more than $2 million.

And you won’t have to file anything with New Jersey to inherit assets from your aunt’s out-of-state estate and you will not owe separate New Jersey inheritance tax, said Frederick Schoenbrodt, an estate planning attorney with Drinker Biddle & Reath in Florham Park.

He said your question highlights the difference between an estate tax and an inheritance tax. While both taxes apply at a person’s death, many people refer to these two taxes interchangeably, but they actually operate in very different ways, he said.

"An estate tax is primarily based on the total value of a decedent’s estate compared to the state’s estate tax exemption amount," Schoenbrodt said. "By contrast, an inheritance tax is primarily based on the identity of a decedent’s beneficiaries, their relationship to the decedent, and the amount passing to certain classes of beneficiaries."

He said Connecticut has an estate tax, but does not have an inheritance tax, while New Jersey has both.

While that sounds burdensome, Schoenbrodt said, the good news is that while a New Jersey estate must calculate the state estate and inheritance tax liabilities separately, the taxes offset each other in such a way that the estate will pay no more than the greater of the two taxes, not the sum of the two taxes.

The New Jersey estate tax will typically apply if the value of a resident decedent’s estate exceeds $675,000 and assets left to a surviving spouse or charity are generally deductible, he said.

New Jersey’s inheritance tax law operates very differently and can apply to much smaller estates depending on the relationship of the beneficiaries to the decedent, he said. For example, transfers from a decedent to a niece or nephew, called a "Class D" beneficiary, are taxed at 15 percent on any amount up to $700,000 and 16 percent on any amount exceeding $700,000. Transfers up to $500 are exempt, but there is no exemption if the transfer is greater than $500, he said.